The 2 Things Warren Buffett Would Never Spend a Dime On

Investors focus a lot of attention on what Warren Buffett buys through Berkshire Hathaway . But it can be equally as informative to understand what he doesn't buy.

The two scary investments
In his 2011 annual letter to Berkshire Hathaway shareholders, Buffett devoted nearly 2,000 words of commentary in a section named "The Basic Choices for Investors and the One We Strongly Prefer."

What were those choices?

  • "currency-based investments," which included deposits, money market funds, and also, more broadly, bonds
  • physical assets, like gold, that don't make anything on their own
  • assets that produce things, like "businesses, farms, or real estate."

So which two did Buffett suggest were dangerous and that he would avoid -- and suggested that we should, too?

The currency-based assets and the nonproductive ones.

And it wasn't even close.

Buffett may sit on top of an imaginary world of cash. But he doesn't suggest you hold onto it. Source: www.insidermonkey.com

The danger of currency
Buffett said that while the safety of investments in things like bonds are often lauded -- U.S. Treasury bonds had a yield of 5.7% since he took the helm at Berkshire 47 years ago -- he suggested that in reality "they are among the most dangerous of assets."

The principal concern is inflation, the reality that with almost every passing day, little by little a dollar loses its value. In the letter Buffett said in the same 47 years, the value of a dollar had fallen by a stunning 86%, meaning that "it takes no less than $7 today to buy what $1 did at that time."

A bond -- or an investment like it -- would need to return 4.3% just to maintain its purchasing power over that time. And while government bonds averaged a 5.7% yield, it's critical to remember that was ­pre-tax. As a result, an investor who fell in the 25% tax bracket would've lost the remaining 1.4% in tax payments.

All of this is to say that the return would've effectively been nothing.

While Buffett suggested there are times when investing in bonds made sense, he also believed "right now bonds should come with a warning label."

Buffett concluded his commentary on bonds by adding:

Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: "Bonds promoted as offering risk-free returns are now priced to deliver return-free risk."

The hazard of gold
Moving beyond bonds, the second type of asset Buffett cautions against are those "that will never produce anything, but that are purchased in the buyer's hope that someone else -- who also knows that the assets will be forever unproductive -- will pay more for them in the future."

The principal one is gold. And the value of gold, and those "investments" like it, is that its value isn't determined by what it can capably produce or yield, but instead an investor hopes that someone will simply be willing to pay more for it in the future.

In Buffett's words:

This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce -- it will remain lifeless forever -- but rather by the belief that others will desire it even more avidly in the future.

Buffett goes on to contrast the value of every ounce of gold on the planet -- worth $9.6 trillion in total -- against an investment in every acre of cropland in America and 16 -- yes, sixteen -- ExxonMobils , which would amount to $8.6 trillion.

Given that perspective, he suggests no one would sensibly select the gold -- which would fit inside a baseball infield  -- against every acre of farmland and an investment in 16 ExxonMobils.

And based on the return of ExxonMobil versus gold since the letter was written in February 2012, it's tough to disagree with him:

XOM Total Return Price Chart

The adoration of businesses
With all that in mind, it should come as no surprise Buffett explains why investing in productive assets is so fundamental and valuable. Unlike the first two, their value isn't predicated by what people are willing to pay for them in times of booms and busts, but instead an ability to create valuable goods or services people desire.

No matter how the underlying value is determined, Buffett suggests that "people will forever exchange what they produce for what others produce."

He concludes by saying:

Berkshire's goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety -- but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we've examined. More important, it will be by far the safest.

Buffett wants us to see that investing in first-class business won't only deliver the best returns, but it will also provide the least risk.

Warren Buffett's biggest fear is about to come true
Buffett just called this emerging technology a "real threat" to his biggest cash cow. While Buffett shakes in his billionaire boots, only a few investors are embracing this new market, which experts say will be worth over $2 trillion. It won't be long before everyone on Wall Street wises up, and that's why The Motley Fool is releasing this timely investor alert. Click here to learn more about what's keeping Buffett up at night and the one public company we're calling the brains behind the technology.

The article The 2 Things Warren Buffett Would Never Spend a Dime On originally appeared on Fool.com.

Patrick Morris owns shares of Berkshire Hathaway and ExxonMobil. The Motley Fool recommends and owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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alfredschrader

Buffett doesn't even spend it on himself. He lives in a $38,500 house and pays himself $100,000 a year. GEICO makes 10 million a day.
Half of his "investments" are in cash equivalents, not stocks. Berkshire Hathaway is a front to hide the insurance carnage. Buffett would have made the 69 billion if he kept it in a trash can.
Did you know that less than one percent of GEICO life insurance is ever paid out ?

July 31 2014 at 6:22 AM Report abuse rate up rate down Reply
rl25227

Somebody tell this guy that you can't take it to the grave!

July 30 2014 at 1:35 AM Report abuse rate up rate down Reply
the2431

Food and Agriculture make sense.

You must eat !

Otherwise, Citizens facing decline in incomes, DEMS can't grow the Economy.

Debt and Paper $$$ only keep up appearances.

July 25 2014 at 10:23 AM Report abuse rate up rate down Reply
Gary

I purchased gold mutual funds a number of years ago. In 2010, I sold them, and the profits bought us a very nice Mt. home in north GA worth $300K. I bought gold as "portfolio insurance," and it not only provided that protection. It also made me tons of money. Yes, I also invest in lots of other things as well, like reaestate, national and international mutual funds, and a selection of tech funds. Buffet is smart, no doubt about it. But it is hard to generalize your advice so that it fits everyone. Gold was very good to us.

July 21 2014 at 3:00 PM Report abuse rate up rate down Reply
Gwen

Let me give you a good picture of how Buffett makes/made his money. I am a paper carrier for one of his media companies. We work 7 nights a week, 365 days a year, in snow, ice, rain, hurricane or whatever. We make <>.10 per paper. However, if we miss a person (after all we aren't perfect), we get charged $3.00 Mon-Sat. and $6.00 Sunday's. Last year, I received a pay decrease. Why, I asked. Because I make more than $8.50 per hour. I have one of the largest routes in my city. I still manage to finish on time, and provide better than normal customer service. I do collections (when customers don't pay the main media company). Since the rate reduction, I now make almost $600 per month less than I have for the past 10 years of service. Pretty good huh? Work screwy hours, unbearable conditions (100+ degrees in the warehouse during the summers), provide good customer service, and many years. Most people that have worked for the same company for the length of time I have, get pay raises! Since being purchased by Warren Buffett, that's a joke. THANKS A LOT WARREN BUFFETT!!!!!

July 21 2014 at 10:22 AM Report abuse rate up rate down Reply
masr.loto

That looks great, add me on the periodic info list! claimscentre14@gmail.com

July 20 2014 at 6:08 PM Report abuse rate up rate down Reply
Gil & Lois

Thanks for all the good info,keep it coming!!

July 19 2014 at 1:13 PM Report abuse rate up rate down Reply
Bbrugoo2

It's just money, hold stock thing that Buffett is good at.

I'm proud of him for navigating his way theru the hard times.

May God Bless him for not making the mistakes like all of the US Presdents done running up the debt ceiling, Buffett doesn't do that.

It's nice to be a Billionaire NOT?

July 15 2014 at 4:41 AM Report abuse rate up rate down Reply
alfredschrader

You wont make money doing it the way Buffett does unless you have a cash cow like an insurance company to back you up.
It is possible to make money in stocks, though. This is one legit way: I almost did this with Chrysler as an example, but Lee Ioccoca beat me by about a week.
How it works is you find a good company that has lost it's top managament and is in decline.
You wait until the shares are trading dirt cheap, then buy all of it for a song, fix it, and multiply your money by 10 times or more.

July 14 2014 at 5:34 PM Report abuse rate up rate down Reply
alfredschrader

This is a lot of hot air. Buffett didn't make 69 billion dollars investing. He made it by selling insurance to GEICO suckers. The investment strategy is a cover story.
Did you know that less than 1% of all life insurance is ever paid out ? And the percentages for auto and home are not much higher. Buffett is actually a loser at insurance when it comes to numbers, he spends a lot on advertising. Met Life has "investments" of over a trillion dollars, about 12 times more than Buffett.

July 14 2014 at 5:21 PM Report abuse rate up rate down Reply